The Consequences of Zero Tolerance

The chart above shows what happens when policy is based on a slogan. In this case “Zero Tolerance.” Procurement rules in both Peru and Colombia require that any public contract tainted by corruption be terminated immediately. As the Brazilian investigation into construction giant Odebrecht unfolded, it became clear that many projects to build highways, power plants, and other infrastructure projects in the two countries had been corruptly awarded.  Authorities in both countries then did what the law told them they must: cancel the contracts.

Most large infrastructure contracts in Peru and Colombia are in the form of Public-Private Partnerships (PPPs), and the immediate termination of a PPP can be enormously costly.  Not only to the firms that paid bribes to secure the contract, but to lenders, suppliers, and the hundreds of other contractors on the project who had no knowledge or involvement in the bribery scheme.  The greatest costs are likely be felt by the citizens of Colombia and Peru.  For as the chart shows, the consequence of zero tolerance is a halt to new spending for roads, power, and other essential facilities as investors and project developers shy away from the risk future contracts will be terminated for the tiniest of infractions by anyone associated with the project.   

Colombians and Peruvians may today be proud their governments are so tough on corruption neither one will tolerate a speck of it in any contract for infrastructure.  Tomorrow citizens of the two countries may have a different view: when power shortages mean the lights won’t come on and the failure to build new roads and maintain old ones produces horrendous traffic jams.  

Last week the World Bank hosted a presentation by Inter-American Development Bank staff where the issue of why “zero tolerance” is a good slogan but a bad policy was examined and means for addressing infrastructure corruption without producing the results shown in the chart was discussed.  A paper the IDB presenters recently published, the source of the figure above and the basis of their presentation, is here.   A video of the session here.  

Guest Post: The One Belt, One Road Initiative Needs a Centralized Anticorruption Body

Today’s guest post is from Edmund Bao, a lawyer with King & Wood Mallesons who works principally in the areas of international arbitration and anticorruption:

The “One Belt, One Road” Initiative (OBOR), spearheaded by China, is an enormous and ambitious infrastructure development project (or series of integrated projects) involving an inland economic “belt” and a maritime silk “road” that together will include approximately 65 countries across Eurasia and parts of Africa, require a total capital expenditure of approximately US$4-8 trillion dollars, and affect around 4.4 billion people (63% of global population). Given the size of the initiative—as well as the fact that infrastructure projects are often considered especially high corruption risks, and the fact that so many of the countries involved are known to suffer from high levels of public corruption—ensuring integrity in this project must be a top priority if it is to succeed. Some projects have already been affected by corruption, including the cancelled US$2.5 billion Budhi Gandaki Hydro Electric Dam Project in Nepal (irregularities in the project bid phase) and the temporary funding halt for the flagship China-Pakistan Economic Corridor Road Project (due to graft).

The countries participating in OBOR have acknowledged this concern. At the opening of the Belt and Road Forum in June 2017, President Xi Jingping called for countries to “strengthen international counter-corruption coordination so that the Belt and Road will be a road with high ethical standards.” And in the joint communique released at the conclusion of the Forum, the leaders of OBOR countries in attendance agreed to “work together to fight against corruption and bribery in all their forms.” Yet it is not yet clear what measures can or will be put in place to achieve the sort of coordination that President Xi and the other OBOR country leaders recognized is necessary.

I suggest that one way—perhaps the best way—to achieve the requisite level of anticorruption coordination in the context of the OBOR initiative is to establish a supranational anticorruption body with oversight for OBOR projects. That is, I advocate the creation of a “Silk Road Anticorruption Body” that would have four primary functions: Continue reading

A Modest Proposal for Improving Supervision in World Bank Infrastructure Projects

Infrastructure funding is a massive component of international development—in 2014, the World Bank alone allocated $24 billion to infrastructure, amounting to roughly 40% of its total lending. Yet as has been widely documented (see here, here and here), infrastructure construction and development projects are particularly susceptible to corruption. Compared with other areas of development lending, such as education and public administration, large construction projects require more specialized contractors and consultants, increasing the points of access for corruption or collusion schemes. Furthermore, labor-intensive industries like construction are often captured by organized crime, which increases their susceptibility to corruption.

Corruption schemes in infrastructure projects often take the following form: a contractor pays government officials a bribe to secure a contract, and in an effort to preserve profits, the bribe-paying contractor compensates for the expense of the bribe by failing to build the project to specification. The supervision consultant—the person or entity responsible for evaluating whether the project has in fact been built to specifications—therefore plays a critical role in stopping or enabling infrastructure construction.

However, when the World Bank funds an infrastructure project, whether through a grant or a loan, the recipient country’s government is responsible for hiring the project’s contractors and consultants—including supervision consultants—subject only to arm’s length World Bank supervision. While this process is also subject to the World Bank’s procurement guidelines, these have been criticized as ineffective in addressing corruption (as previously discussed on this blog). Under the current system, if a project has not been adequately completed because of a corruption scheme, government officials have every incentive to retain inspectors willing to mask the abuse of funds. And if the Bank does discover fraud or corruption after the fact, its remedies are limited: the Bank can suspend or bar contractors from future contracts, and can refer matters to national prosecuting authorities, but successful convictions amount to fewer than 10% of sanctioned parties.

The World Bank must therefore prioritize prevention of these situations. Given the existing system, one measure that the World Bank could take to help prevent corruption in infrastructure projects, is to fund independent supervision consultants. Continue reading

Reducing Corruption Risks in Public Works Construction: The Critical Role of Project Preparation

Jill Wells, Senior Policy and Research Advisor, Engineers Against Poverty, contributes the following guest post:

With the creation of the Asia Infrastructure Investment Bank and the Global Infrastructure Facility, as much as an additional $1 trillion a year is likely to be invested in the construction of roads, power plants and other public works in the developing world over the next decade.  While this new investment could provide a welcome boost to economic growth and poverty alleviation, it could also be a curse.  Public works construction is regularly rated the most corrupt industry in Transparency International surveys, and if even a small percentage of this money is lost to corruption, the harm could be enormous.  The development community thus needs to step up efforts to help developing nations prevent corruption in the construction of public works.

To date, most prevention efforts have focused on the award of the contract to build the facility, but that decision is only one of many that must be taken in the process of selecting, preparing, and building new infrastructure.  A new report from the U4 Anti-Corruption Resource Centre identifies the corruption risks at the pre-tender stage and explores how additional opportunities for corruption may arise at later stages of the project cycle when the initial selection and preparation process is compromised.   Continue reading

The New Chinese-Backed Infrastructure Bank: Will it Tame the Corruption Dragon?

Asian governments are welcoming China’s recent decision to establish a bank to finance infrastructure across Asia.  As Devex reported June 2, China plans to capitalize it with an initial $50 billion with the possibility of increasing it by an additional $100 billion.  For China, the bank is one more way to assert leadership in the Asian region.  For Asian states leery of relying on the Western-led World Bank and Asian Development Bank for financing public works, the bank is a chance to diversify.  For both the lender and borrowers alike, the bank offers the chance to profit from Asia’s economic dynamism.

The Chinese-led bank will have to overcome many challenges to realize these objectives, the most difficult of which may well be preventing corruption from infecting the projects it finances.  Infrastructure corruption produces half-built roads, dilapidated ports, and white elephants of all kinds.  It leaves borrowing governments indebted for under-performing, over-priced assets while stirring a backlash against the lender.  Will the new bank and its principal backer be able to keep the corruption dragon at bay?   There are at least three reasons to worry that it won’t.  Continue reading